Wednesday, June 15, 2005

The child tax credit

For the most part I agree with Bruce Bartlett's argument that conservatives should focus more on tax reform. However, I tentatively disagree with him about the child tax credit. Bartlett wants a flat tax, so as to minimize distortion of the economy. That's all well and good, but I think children have important positive externalities. In particular, our future fiscal problems with Social Security and Medicare are significantly effected by how many workers there will be to support future retirees. The number of retirees in, say, 2040 is essentially fixed (caveat: unexpected increases in life expectancy can't be ruled out). The number of workers in 2040 will be essentially fixed around 2020. Massive increases in immigration can't be ruled out, but there are reasons to believe (linked to long ago) that they won't occur. I'm not just talking about a possible anti-immigrant backlash:
Another constraint on immigration to the United States involves supply. Birthrates, having already fallen well below replacement levels in Europe and Asia, are now plummeting throughout Latin America as well, which suggests that the United States' last major source of imported labor will dry up. This could occur long before Latin nations actually stop growing -- as the example of Puerto Rico shows. When most Americans think of Puerto Rico, they think of a sunny, over-crowded island that sends millions of immigrants to the West Side of New York City or to Florida. Yet with a fertility rate well below replacement level and a median age of 31.8 years, Puerto Rico no longer provides a net flow of immigrants to the mainland, despite an open border and a lower standard of living. Evidently, Puerto Rico now produces enough jobs to keep up with its slowing rate of population growth, and the allure of the mainland has thus largely vanished.

For its part, sub-Saharan Africa still produces many potential immigrants to the United States, as do the Middle East and parts of South Asia. But to attract immigrants from these regions, the United States will have to compete with Europe, which is closer geographically and currently has a more acute need for imported labor. Europe also offers higher wages for unskilled work, more generous social benefits, and large, already established populations of immigrants from these areas.

Even if the United States could compete with Europe for immigrants, it is by no means clear how many potential immigrants these regions will produce in the future. Birthrates are falling in sub-Saharan Africa as well as in the rest of the world, and war and disease have made mortality rates there extraordinarily high. UN projections for the continent as a whole show fertility declining to 2.4 children per woman by mid-century, which may well be below replacement levels if mortality does not dramatically improve. Although the course of the AIDS epidemic through sub-Saharan Africa remains uncertain, the CIA projects that AIDS and related diseases could kill as many as a quarter of the region's inhabitants by 2010.
Given the importance of birth rates, how elastic is the demand for children with respect to tax credits? If it is very inelastic, then by all means, let a flat tax steamroll it. However, I suspect there is enough elasticity to make the child tax credit worthwhile, perhaps enough to justify increasing it. Alas, I have only anecdotal evidence. (And to be fair, things like generous family leave policies for workers in European welfare states haven't solved their fertility problems.)

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